Friday, April 29, 2016

After another strong showing in the latest primaries, Donald Trump looks increasingly likely to be the Republican nominee. It's now mathematically impossible for his competitors to reach the magic number of delegates required to be assured the nomination. Indeed, it's virtually impossible for his competitors to catch up to his delegate count, even when combined, yet they are still staying in on the hopes of a convention coup.

In the face of this increasing inevitability, Donald Trump has been working to consolidate establishment support behind him. To that end, he recently gave a long foreign policy speech that was slated to be a more deliberate and premeditated talk than Trump's usual off-the-cuff style. After weeks of everyone saying his understanding is shallow or vague, this was supposed to be an opportunity for Trump to lay out specifics and prove them otherwise.

Unfortunately, despite the planning that went into this one, it came off much like the others. His speech still consists of a series of slogans. Some ideas are eminently laudable for advocates of peace and nonintervention, but there are just as many bad ideas in there to balance it out. Thus, Trump occasionally expresses a reluctance to use force, but at the same time condemns diplomatic successes that required compromise. Similarly, Trump calls for placing American interests first, which is a generally good idea, and tends to imply that we would only intervene abroad in narrow corcumstances that truly impact American security. But then he also says we need to try to bring stability to many other parts of the world. This is problematic because US administrations for several years have interpreted the need for stability as a need for American military involvement, actual results notwithstanding. And so, the two are almost pure contradictions of the other, and it's anyone's guess which Donald Trump we will actually get if he is elected.

What is perhaps more concerning is that it's not clear whether these contradictions are the product of deliberate political calculation or just ignorance. One could imagine a politician giving a speech like this because he gives everyone a little something to like. If you believe in piece, you can point to parts where he expresses reluctance to use force. If you want to see more hawkish positions, you can latch onto various condemnations of Iran. Then again, it seems just as likely that Trump's understanding of these terms and issues is so cursory that he literally doesn't know the contradictions are there. Time will tell.

But having said all that, it's worth saying a word in defense of Donald's somewhat incoherent positions on foreign policy. (And I'm not using incoherent pejoratively here, but literally--that the ideas don't all fit together.) The reason is that, while it's fair to say that Hillary Clinton's foreign policy positions are coherent, they are also dramatically worse. With Trump, there's a chance that America would end up with a less militant president who really does prioritize negotiation. With Hillary, we all know what we'd get--a president that has never met a conflict that she didn't want America to participate in.

For more on Trump's speech, check out the excellent analysis by Daniel Larison and The American Conservative.

Thursday, April 28, 2016

You don't have to observe American politics for very long to understand that politicians routinely break their promises. This is especially true and obvious when it comes to US Presidents. In some cases, the promises seem to be sincere and the president may have even really tried to get them implemented, only to be blocked by political obstruction in Congress. In other cases, it's more clear that the promise was nothing more than a rhetorical flourish in the first place.

Of course, our political campaign system is very much structured to produce this effect. In the primary, Democrats usually run to the left on everything; in recent years, this has meant advocating more for peace and civil liberties. Then in the general election, they walk many of these ideas back and try to prove they're just as tough as the Republicans are. For Republicans, this works in the opposite direction. The primary typically sees them take more extreme and awful positions on foreign policy, torture, etc., and then they try to pretend to be a little less inclined toward violence in the general election. The inevitable result is that the same candidate will often take different, and contradictory, positions as they move from the primary to the general election. And if they get to the White House, they often change their another time, either in response to political realities they confront or because they no longer need to appeal to the American people, at least for the time-being.

So campaign promises get broken all the time, and it's pretty much par for the course at this point. Ambitious declarations immediately upon winning an election or taking office can basically be seen in the same way. Thus, although President Obama declared that Guantanamo Bay would be closed within a year of taking office, this went the way of most promises--unfulfilled.

Recently, President Obama has taken the usual political art of breaking promises to an entirely new level. Back in 2013, the Obama Administration suffered a devastating defeat in its first push for initiating a major war with Syria. They intended to let Congress weigh in on the proposal, and when it became clear that the pro-war side was going to lose that vote, it was promptly canceled.

In the aftermath of this, the Administration realized it needed a better and more subtle approach to get the American people to accept another military intervention. The rise of ISIS certainly helped provide a more compelling rationale for US involvement than President Assad of Syria ever could. But that alone probably wouldn't be sufficient to justify another US war in the Middle East, when none of the others have worked.

Thus, to mollify American fears of an extended conflict and more Americans getting sacrificed for an obviously counterproductive policy, Obama pledged that there would be "no boots on the ground". With each escalation in Iraq and Syria, this refrain was offered. And now, with the regular announcements of more troops in Iraq and Syria, it's been proven false.

It's tempting, of course, to see this as just another broken promise from a politician. And in some ways, it is. But it's also different and worse in two important respects.

First, this wasn't a campaign promise. President Obama made this pledge repeatedly while he was president. He knew all of the political realities. And since it's in the realm of foreign policy, where the president has near-complete discretion (in the modern era), this was entirely within his own power. Congress barely has enough initiative to pass a budget; it certainly doesn't have the wherewithal to start (or even declare) a new war. Thus, this is an area where President Obama basically cannot be forced to take an action he disagrees with. Yet, he did it anyway. And he did it in spite of no ISIS- or Syria-directed plot on American soil. (The reader will recall that the San Bernardino attack occurred relatively recently, after the pledge had already been broken, and was not organized by ISIS anyway, though the attackers did sympathize with their cause.)

The second way that the Obama Administration's conduct is now unique and tragically worse is the way it has tried to deny their dishonesty. At first, this meant trying to change the meaning of "no boots on the ground" to mean no large battalions on the ground. And now, they appear to have pivoted to outright denying the pledge ever occurred in the first place.

In a recent press conference, Pentagon spokesperson John Kirby denied that anyone ever said there would be "no boots on the ground" in spite of the fact that this can be disproved in all of three seconds with a Google search. It's tough to imagine John Kirby actually believes this, given that it's his whole job to know and defend the Administration's / Pentagon's talking points. So instead, we must assume it's a deliberate PR decision to openly troll the American media and public to see just how quickly we are all willing to forget things that even the most casual observer has to still know. Every President and politician tries to rewrite history in their favor, but the Obama Administration appears to be breaking new ground by trying to do it so quickly and blatantly. It remains to be seen whether many people will notice and care. Given that it's on an issue as important as war and peace, let's hope the answer is yes.

For more on this, and to read the funny-if-it-wasn't-sad exchange where Kirby tries to deny reality, check out Justin Raimondo's write-up at Antiwar.com:

Wednesday, April 27, 2016

The presidential campaign of Bernie Sanders has been a deeply frustrating spectacle. While he doesn't offer much to like from a libertarian perspective, his primary opponent, Hillary Clinton, is the most adamantly militarist candidate in the race. Thus, among the Democrats, Bernie is the preferable candidate by default.

That's why I wish he'd make it easier to support him. Just about every time he comes out and says something good, there's a little something in his record or his outright remarks that is there to spoil it. It's kind of a story of two steps forward, (at least) one step back. Here are some choice examples:

Finally criticizes Hillary Clinton on Libya (lightly) in a debate... but she correctly points out that he actually supported (co-sponsored) a resolution that condemned the Libyan government. (This resolution didn't ultimately justify the war, but it was an early attempt toward that direction. And this is typically how the foundation for regime change gets laid.)

Now, it appears we add another example to the list, smoking. Allow me to explain.

Recently, and don't ask me why, the issue of soda taxes has come up in the Democratic Primary. Bernie Sanders took the correct position on this issue, opposing the imposition of soda taxes, while Hillary Clinton supports them. To his credit, Bernie's reason for opposing the soda tax was also logical and appropriate--namely, that soda taxes are disproportionately paid by low-income people because they tend to drink soda more. Thus, the taxes are regressive by design (where poor people pay a greater share of their income toward the tax than rich people do), and it's consistent with Bernie's focus on income inequality to oppose it on this basis.

The problem came a couple days later in an interview with Meet the Press. Bernie was asked again about the soda taxes, and basically restated the position above. Then, the host asked if he felt the same argument should apply to cigarette taxes. After all, cigarettes are also consumed primarily by lower-income people, and are thus also regressive. Bernie's response to this line of questioning was about as bad as possible:

CHUCK TODD:
So you must be against cigarette taxes, too, then?

SEN. BERNIE SANDERS:
No, I'm not. Cigarette taxes are-- there's a difference between cigarettes and soda. I am aware of the obesity problem in this country.

CHUCK TODD:
I don't think Michael Bloomberg would agree with you on that one?

SEN. BERNIE SANDERS:
Well, that's fine. He can have his point of view. But cigarettes are causing cancer, obviously, and a dozen other diseases. And there is almost the question as to why it remains a legal product in this country.

See what happened there? The difference between soda and cigarettes is one of degree, at least in the context above. No one would dispute that soda and cigarettes are both harmful to our health. It can be argued that cigarettes are more harmful on a per use basis. But the essence of the question is the same. Both taxes primarily hurt poor people, and both taxes would be applied to a voluntary action--thereby assuming that the government should be in the business of helping tell poor people how to live a better life. It's not often appreciated in this context, but we should recognize that there's something deeply creepy about that. This is typically most obvious when one learns about preposterous antiquated laws against certain sexual behaviors (like sodomy) that were deemed deviant at the time, or, to use a more modern example, laws against marijuana use that grow more unpopular by the day. What all these laws have in common is that the government is trying to get involved in people's personal lives and influence their personal behavior, either to prevent them from harming themselves or being morally corrupted. They don't work, and they shouldn't be tried in the first place.

But speaking of pot, there's actually something even more alarming about what Bernie said above. Really, he wasn't just taking a hypocritical position on cigarette taxes. On the contrary, he was, at least implicitly, taking it a step further and suggesting that cigarettes should possibly be totally illegal. Over at Reason, the irony certainly was not lost on them. The same Presidential candidate that has openly called for marijuana to be legalized was hinting at banning the use of a different smokeable plant--namely, tobacco.

Of course, to be fair to Bernie, I don't anticipate him rolling this out as a platform plank any time soon. But the fact that this is how he thinks is bad enough. It doesn't make sense. And it highlights one fundamental problem with Bernie's campaign--when it comes to key issues, many of Bernie's ideas aren't grounded in principle. Instead, he seems to be taking them on a case-by-case basis, so we shouldn't be surprised that he can get something like this wrong.

To see this, it's worth trying to come up with a consistent rule that could justify all three positions: Don't tax soda, do tax cigarettes (or ban them), and legalize marijuana. Here's a few leading contenders we can rule out.

Everything giant corporations are involved in is evil.

This one seemed promising at first given Bernie's sensibilities, but it breaks down on soda taxes. Pepsi and Coca-Cola are giant corporations as surely Phillip-Morris is so this one isn't going to work.

People should be allowed to make their own choices about health without government interference.

Again, cigarettes break the mold.

The effective rationale Bernie must deploy to square these ideas is that we shouldn't tax poor people and people should generally get to make their own decisions, but if the habit is potentially deadly, then government can try to stop it. Of course, this is essentially the same thing as taking a case-by-case approach. Who decides what the threshold is for when something is so deadly that it needs to be prohibited or taxed? What are the standards? And do we even know that cigarette smoking is actually worse for your health than marijuana? I'd guess that it probably is. On the other hand, marijuana is thought to impair your driving abilities while cigarette smoking does not. How does that factor into the calculation? And can someone please get me some kind of decision matrix so I can figure out what position to take here?

See how complicated that gets? Frankly, I feel bad for Bernie. If that's what I was working from and I was put on the spot, I don't think I'd do much better than he did. But if you have real, sound principles, it's easy to know the correct, and intellectually consistent position. And naturally, as a libertarian, I'd recommend the nonaggression principle. Let's try it out.

The nonaggression principle holds that people should basically be allowed to do as they like, provided they do not harm other people or violate their property rights. The popular shorthand is "Don't hurt people and don't take their stuff." Using the nonaggression principle, here's how libertarians would respond to a few of the questions we've been discussing:

Should the government place a tax on soda?

Are you serious? Absolutely not. A person's decision to drink soda does not harm anyone besides the consumer. They should be free to do what they want, and the government shouldn't be involved.

Should the government ban smoking cigarettes?

No. Again, a person's decision to smoke cigarettes primarily affects only them. Thus, they should be free to do what they want and government shouldn't target them. Having said that, there is a chance that secondhand smoke can affect other people, which brings us to...

Should the government ban smoking (cigarettes or otherwise) in establishments open to the public (restaurants, bars, etc.) in order to prevent harm caused by secondhand smoke?

No. Individual property owners should be allowed to decide whether or not they allow smoking in their establishments; the government should not make a one-size-fits-all decision in either direction. In publicly owned places, like parks or government buildings, however, the issue gets more complicated. Ideally, libertarians would suggest limiting the amount of publicly owned property to minimize the dispute.

Should the government legalize marijuana?

Yes. Again, private people should be allowed to make choices for themselves and the consequences of marijuana consumption fall on the consumer (aside from the secondhand smoke issues, which we addressed above.)

There are no contradictions, and it's not hard to figure out. And note that I support the positions above in spite of the fact that, personally, I cannot stand cigarette smoke. Seriously, it's a little ridiculous how much I dislike it. If I'm in a group of people where just one person happens to be smoking, even if it's outside, I have to leave. I just physically don't tolerate it, and I get choked up whenever I'm near it. And to the extent that smoking is occasionally a social phenomenon, it makes me act more than a little awkward. Fortunately, my personal preferences are not relevant here. I would hate to see my favorite restaurants reintroduce smoking if Portland's current ban was lifted, but even so, I would absolutely vote in favor of lifting the ban to let private property owners decide.

If you have principles, then arbitrary preferences cease to matter. It's easy to determine the right positions, and you never have to worry about being a hypocrite, either on foreign policy or domestic policy. And while it's true that the nonaggression principle isn't sufficient to determine your position on every issue, it's a pretty good starting point. At least on questions of personal liberties, Bernie would do well to try it out.

Tuesday, April 26, 2016

This week in horrible economic policy news, we learned that the central bank of Japan is top 10 shareholder in fully 90% of Japan's leading public companies. Admittedly, this probably sounds like an exceedingly mundane and boring fact if you aren't too familiar with how central banking works. But once you understand what's going here, you will recognize it for what it is--a scandalous economic policy that is destined to go down in flames, and take many innocent bystanders with it. In this post, we'll explain what this policy is, why it matters, and why this is another sign that the global economy is well on its way to the next collapse.

Central Banking and Monetary Policy*
The central bank can be thought of as the bank for banks. It is the institution where commercial and consumer banks store their extra cash, and it is well-known for serving as the lender of last resort to prevent bank runs. Individual banks never have enough money on hand to fulfill all the deposits that have been made with them. The reason for this is that some of the money stored by individual depositors has been given out in loans to other customers. This is where the name fractional-reserve banking comes from. At any given time, each bank only has a fraction of their total deposits on hand and ready to meet deposits. Though this fact is not commonly understood, there's actually nothing inherently underhanded or shady about it; it's just how the modern banking system works. And because modern banking works this way, all banks are always technically at risk for a bank run where many of their depositors come knocking all at once and demand more cash than the bank can provide. This can probably be viewed as the main reason that central banks came into being--to lend banks money when they are faced with a bank run.

In the aftermath of the Great Depression and with the steady rise of Keynesian economics, however, the US central bank, the Federal Reserve, eventually adopted a broader role. Now the Fed's mission is not only to serve as the lender of last resort, but to also manage the money supply (which is precisely what it sounds like, the amount of money in existence) in order to ensure a healthy economy. And in particular, the Fed's goal was to ensure both low inflation and low unemployment, often referred to as the dual mandate. And the basic way they go about pursuing this goal is by adding money to the economy (by lowering interest rates and/or directly injecting money into the system) when it is in a slump, and reducing money in the economy when it looks like it is overheating. In practice, the first part of that process, injecting more money, happens frequently, but the second part rarely does.

For our present purposes, the key thing to understand is that the central bank, in the US and elsewhere, literally has the power to create money out of nothing. When it wants to inject new money into the system, it will frequently buy US Treasury Bonds. And when it makes these purchases, it usually does so with money that, prior to the purchase, did not exist. It sounds strange, but it's the truth. The only difference between a counterfeiter and a central bank creating money is that it's illegal for the counterfeiter; if they were both using the money to purchase Treasury Bonds, the impact on the actual economy would be the same. Obviously, this is a very significant (and dangerous) power.

If the central bank does too much money creation, there's a risk of having massive inflation. In the current situation, however, with consumer spending down and oil prices down as well, most consumer prices are basically flat. Thus, most central banks have judged that the risk of inflation is limited, and that we might actually need more of it. You see, most mainstream economists view deflation (generally falling prices) as the supreme evil that must be avoided at all costs.** And to prevent this from occurring, they are pulling out all the stops to get more money into the economy and cause inflation.

What to Buy
We mentioned above that the Fed typically buys Treasury Bonds (US Government debt) when it wants to inject money into the economy. There's a good reason for this. Treasury Bonds are very heavily traded, which means they are easily bought and sold. It also means that the Fed's purchases or sales on any given day probably won't have a huge impact on the broader market; they're still a large player, but their presence is diluted by the actions of so many other investors. Another benefit is that the value of Treasury Bonds is relatively stable. And to the extent that the Fed profits off of the interest on US Government debt, that gets remitted back to the US Government at the end of the year anyway, just like all of the Fed's net profits. So, viewed in the most optimistic sense, this is sort of like one arm of the US government lending to another arm. (Yes, people pretend the Fed is independent, but we've previously explained how deeply silly this belief is.) In effect, the Fed's demand for US government debt, subsidizes the government's borrowing costs. And given that it's inevitable that the Fed's efforts to inject money will subsidize something, this is probably about the least distortionary effect. That doesn't mean it's a good thing, but it's probably the least bad.

A related point here is that it matters what the underlying assets are. Each time the Fed wants to inject money into the market, it acquires an interest in real assets. When it buys government debt, it gains an interest in the government's assets. If the US government were to default, then the central bank (again, effectively a different branch of the government) theoretically would gain some power over US government assets. Again, this isn't ideal, but you could do worse (as we'll see).

So to revisit, if a central bank is going to buy financial assets (and most, if not all, of them do it), the things it buys should have the following characteristics:

Highly liquid

Highly traded market (so the central bank doesn't make a big dent in the price)

Stable value

Limited subsidy impact

Neutral ownership interest (owning other government assets)

The Case of Japan

Now that we've laid out some general principles about how central banking is supposed to work, we can observe how the central bank of Japan is blatantly violating them. The unoriginally named Bank of Japan (BoJ), has had a policy of buying Japanese government bonds just as the Fed buys US debt. However, the BoJ has actually implemented an even more aggressive form of Keynesianism over the years than the US has. Indeed, the BoJ has purchased so much of Japanese government debt that it was starting to harm the liquidity of the market--that is, it couldn't find enough sellers to buy from. But since the threat of deflation still looms large in their mind, the BoJ turned its attention to purchasing other assets besides government debt, all in the name of trying to stimulate the economy by adding more money.

One of the asset types it turned to is an ETF, or exchange-traded fund. This is effectively a mutual fund that is traded on the open market, so it's effectively a basket of major stocks. Thus, once we peel back the layers, the fact is that the BoJ has been purchasing stocks for some time now.

This fact is shocking and problematic for a whole host of reasons. Let's use our original criteria above to spot a few:

Less liquid and less heavily traded - While the BoJ owns shares of large, highly traded companies, the fact is that stocks are much more prone to panic sell-offs than government debt. If the BoJ tried to sell off its stake, the value would likely decline rapidly.

Unstable value - Obviously, stocks are not known for having a stable value over time

Subsidy - The BoJ is now effectively subsidizing the shareholders of individual companies

Ownership - The BoJ, which is to say the Japanese government, has now accidentally gained a large ownership share of major companies.

Another important fact is that this completely distorts stock market prices and deprives investors of the ability to make accurate decisions. As it stands, the Nikkei has dropped over 13% over the past year. Imagine how much more it should have dropped, if the BoJ had not been using its money creation power to artificially prop up the prices. Given the significant holdings the BoJ now has, the difference is likely to be considerable.

Of course, few people like the idea of falling stock prices. But it's more important for stock prices to reflect reality than it is for them to maintain a certain price level. Stock prices are used to help allocate scarce investment capital among different companies; if the prices are manipulated, then the allocation will eventually be wrong too. As an example, if a company starts losing money, its stock price needs to fall. This will likely have some adverse consequences for management and help motivate them to improve performance. Additionally, it helps prevent new investors from pouring more money into the company at high prices, when other companies might be a better value. If the prices get distorted, the entire market process is liable to break as well.

The problems get compounded further if we assume the central bank is deliberately trying to prop up stock market prices, which there is some evidence for in the case of Japan, as noted in the Zerohedge piece. If this is the case, the central bank has exactly the wrong incentives. A typical investor in the stock market is looking for companies that may currently be undervalued and likely to perform well in the future. By contrast, the central bank's only incentive is to prevent prices from falling, regardless of actual value. And since the companies that are performing the worst are likely to have the fastest falling stocks, it follows that the central bank will tend to give the most money on the worst performing companies.

If pressed on the rationale for this program, the BoJ would likely argue that their actions are necessary to stabilize the economy (by injecting money generally) and protect small investors from getting wiped out. But here we must remember that stock prices are not an end in themselves. If a company is failing, the BoJ's action to prop up its stock will not save it. Indeed, it might actually cause the company to behave more recklessly as the executives in charge feel no pressure to change. At best, the BoJ could delay a stock market collapse; it can't actually prevent it.

There's also a strong corruption angle here. In a market environment where market prices are no longer based on the profitability and fundamentals of the underlying company, small investors don't have a chance. Even if they understand finance and economics, it's useless because the company's performance is no longer the key driver of the stock price. Instead, the key driver becomes central bank policy, and the only way for investors to make money is to guess (or quietly learn) the central bank's policy in advance. This opens up the opportunity for well-connected financiers to get tips, but the average small investor is going to be left out in the cold.

And all of this explains why this story is outrageous. The BoJ is printing new money to benefit public company shareholders. And in the process, it's massively distorting financial markets, subsidizing inefficient companies, denying small investors any chance at success, and, on top of it all, subtly nationalizing private companies. This policy is a clear act of desperation by the BoJ, and the unintended consequences are certain to be devastating. For now, it's barely keeping the Nikkei afloat. But when it finally crashes, the policy helps ensure the collapse will be as painful as possible.

*Before we get started, note that none of what follows should be taken as an endorsement of central banking. I share the view common among the Austrian School of economics that the net impact of central banks on the economy is decidedly negative. But that larger issue is not the subject of the present post. Thus, we're going to describe the central bank in a neutral way and describe the role that more conventional economists believe it should play in the economy.

**There are compelling reasons to reject this idea in general, but for our present purposes, we'll just stick with the mainstream view.

Sunday, April 24, 2016

The current political season has been marked with unprecedented levels of disillusionment in both political parties. This is most evident in the success of the insurgent candidates of this election--relative success in the case of Bernie Sanders in the Democratic race, who is far exceeding expectations though still behind, and absolute success in the case of Donald Trump, who seems all but certain to win a majority of delegates prior to the Republican National Convention. As two different brands of populism, Trump and Sanders both clearly represent an anti-establishment position, and their views overlap in a few areas, especially trade (less of it) and the appropriate size of government (larger).

Of course, it's still probably too soon to tell whether either of these candidates will become a major party nominee. The road looks pretty steep for Sanders, and even though Trump is technically winning, the Republican nomination is likely to go to a brokered convention, where Trump's support could rapidly disappear.

This situation--where two widely popular candidates might lose the primary election to more conventional candidates--has many people getting frustrating with the primary process itself. On the Democratic side, this was most apparent after the problems with the New York primary, which is a very closed primary to start with and experienced many voter complaints on the day of, primarily from Bernie Sanders supporters in the reports I read. And on the Republican side, outrage swelled after Donald Trump earned no delegates in Colorado due to its unique election rules.

The frustration is obviously understandable. And it has bubbled over into condemnation of the primary process itself. And there's a lot not to like:

The use of "superdelegates" in the Democratic race allows a party insider to cast a vote that is equivalent to a pledged delegate from the actual votes that take place. So for example, the Democratic primary in Delaware yields 21 delegates decided based on the votes. That means, a random political party insider's vote counts for roughly as much as 5% of Delaware voters. And not surprisingly, the overwhelming majority of superdelegates are supporting Hillary Clinton.

The use of closed primaries in both parties. These primaries allow only registered members of the party to vote in the primary election. And given that party membership in both parties is near historic lows, this disenfranchises many voters. In the context of the New York primary, Bernie Sanders noted, presumably accurately, that 27% of eligible New Yorkers couldn't participate because they weren't registered for either party.

The use of a brokered convention to overturn the will of the voters, which is of particular importance in the Republican party and the #NeverTrump movement.

Again, it's perfectly understandable to be irritated about these things. But the fact is that the Republican and Democratic parties are independent, private organizations at the end of the day. Individuals are free to associate or disassociate themselves from either party whenever they want. So the Democratic party is allowed to have superdelegates and closed primaries that require people to register months in advance. And the Republican party is allowed to use arcane rules that give greater influence to political insiders rather than average voters. The end result is a process that is less than democratic.

These are not good things, perhaps, but we should be careful to support the appropriate remedy. If we dislike the nominating process for the two main political parties, the goal should not be to have the government dictate new rules for these parties. Instead, our solution should be to look toward other parties that may have a more inclusive and transparent process--perhaps the Green Party or the Libertarian Party, depending on your sensibilities.

There are many reasons to prefer this competitive solution to a regulatory one. First, we have to acknowledge that the two major parties are currently in power in every state in the US and in the federal government. Thus, unless it was done via referendum, the new rules for political parties, would be written by the parties themselves. It goes without saying that this is unlikely to produce a good outcome. Just as we do not think Goldman Sachs should write new financial regulations, we shouldn't want Democrats and Republicans to be charged with making political party regulations.

Second, we should acknowledge that one reason the nominating process is as convoluted as it is currently, is that political parties want to ensure they can't be co-opted by outsiders. While this is undemocratic in a sense, we can also see how it could be desirable. A popular suggested reform for the primary system is that of open primaries, which would allow any registered voter tovote in any party's primary election. In the current campaign, this would have the likely result of benefiting the insurgent candidates in the major two political parties. But such a rule would presumably also be applied to smaller third-parties. This in turn means that third-parties, which have a relatively small voting base, could be strategically targeted by outside parties. So Republicans irritated by a Trump presidency would set their sights on taking over the Libertarian process (and would likely succeed, given greater numbers and financial resources), and Democrats depressed by a Bernie Sanders victory, could try to co-opt another third-party. If we allow the government to control the nominating process for political parties, it's possible that we end up at a place where we have even fewer alternatives than we do now.

Instead, we should prefer the solutions that we can control. If you don't like how the Democratic party has treated Bernie Sanders, vote for the Green or the Libertarian in the general election. If you don't like it when the RNC inevitably tries to prevent Trump from getting the nomination, then they should be punished in the general election too. It's not throwing your vote away; it's expressing your discontent in the only way* the political parties care about.

We'll have to wait and see how the final Democratic and Republican nominations are to say for sure. But chances are high that the best option for most of us--whether progressive, libertarian, or just generally disappointed--will be to Vote for Anyone Else.

*Technically, I'm sure large political donations could do the trick as well. But unless you have an incredible amount of money, this probably isn't in the cards.

Thursday, April 21, 2016

The governor of Nebraska just signed in a law that almost entirely eliminates the practice of civil asset forfeiture in the state. If you believe in the idea that people should be considered innocent until proven guilty by the courts, then this is great news.

Civil asset forfeiture is a harmless-sounding phrase that actually represents one of the worst things that government does (domestically, that is). In a nutshell, civil asset forfeiture refers to the practice where law enforcement confiscates someone's assets, regardless of whether they have been charged or convicted of a crime, and then is allowed to use a share of the proceeds from the assets to support their own department. If a victim (i.e. the person whose assets were confiscated) wants to get their property back, they have to prove that the property was not derived from criminal activity. Or, in other words, they have to prove innocence, instead of requiring the courts to prove guilt.

If this seems a little backwards, it should. And like many bad and harmful ideas, this one is usually justified in the context of the War on Drugs. The basic idea is that this will allow cops to cut off the resources from the "bad guys". And in a perverse way, there's actually some logic here. Obviously, most drug transactions, being transactions, are voluntary. There is a seller and a buyer, and as long as no force or fraud is involved in the process, it's a voluntary exchange between two parties that both get something they want, just like any other transaction in the marketplace. While that would seem like a good thing, it creates a problem for law enforcement. Obviously, if both parties to the sale benefited, neither has a compelling reason to report the other to law enforcement for breaking the laws on drug prohibition. This, in turn, makes it harder for law enforcement to find and prosecute these people. It also happens to make the illicit drug industry more profitable, since the likelihood of being caught is relatively low. (We've also previously commented on the less-than-intuitive fact that illegal nature of drugs also directly increases profitability from the drug trade for people that are willing to participate in violence.)

Now, the correct and rational response to the problem outlined above is to stop trying to enforce drug laws. They are the quintessential victimless crime, and whatever harm drugs may do, that harm is confined to the user, is demonstrably not prevented by making them illegal, and is, frankly, none of anyone else's business besides the drug-seller and drug-consumer.

Unfortunately, law enforcement, and government generally, do not have a strong track record for favoring libertarian solutions. Civil asset forfeiture is one of the alternative solutions they have come up with instead. So it's hard to prove that a suspect has committed a drug crime, eh? Well, let's just take their money and assets, and make them prove they're innocent instead! What could possibly go wrong?

The answer, it turns out, is quite a lot. Innocent people get swept up in the scheme all the time. And rather than recounting the details here, I'd recommend this excellent (and thankfully non-partisan) segment from Jon Oliver on Last Week Tonight.

On the plus side, Nebraskans have just taken bold action to limit civil asset forfeiture. And for the details on that, check out this quick write-up from Reason.

US participation in the War in Iraq continues to build this week with the announcement of 200 more troops, Apache helicopters, and $415 million in new aid for the Iraqi Kurds in the name of battling ISIS. Additionally, Defense Secretary Ash Carter said that American troops will now be moved "closer to the action," though the US appears to still be committed to describing them as "advisers".

Naturally, the move is a reminder of how far we've come from President Obama's oft-repeated promise of "no boots on the ground" in the latest Middle East war. Now, not counting Special Operations forces, there are officially around 4,000 troops in Iraq, and The Washington Posthas reported that the actual number is close to 5,000.

The new announcement is also a good time to remember that the war against ISIS remains thoroughly illegal. Congress has not passed an Authorization for the Use of Military Force, let alone a formal declaration of war. Instead, President Obama is still relying on the legal authority passed in the aftermath of 9/11 to go after Al Qaeda and associated forces. This rationale is absurd, not only because of how long ago it was passed, but also because Al Qaeda and ISIS have had a very public split and are in no way "associated forces". Still, the escalation continues regardless, as most Democrats refuse to break step with their President on foreign policy and most Republicans can't bring themselves to oppose a war, no matter how futile.

All of which brings to the question of effectiveness, "Will it work?" In part, the answer depends on one's definition of success. If the goal is to merely unseat ISIS from Mosul, that goal is certainly within reach if the US is willing to throw enough money and bodies at it. However, if the goal is to create a sustainable political outcome in which a group like ISIS cannot gain a foothold, there is virtually no conceivable way in which the US's growing intervention will succeed.

Unfortunately, there's good reason to believe that Obama is operating on the first definition. In a recent interview cited in the Reuters piece, he said this:

My expectation is that by the end of the year, we will have created the conditions whereby Mosul will eventually fall.

Clearly, Obama is not concerned about the all important question of what comes next. Instead, he is only concerned about his own political legacy, and, perhaps, the electoral chances of his party in the upcoming election. But neither of those require a long-term strategy. All they require is a well-timed victory moment sometime this year and a relative pause in hostilities that is long enough to give the impression of stability where none exists. Then when chaos invariably resumes, it will be someone else's problem.

That's the current trajectory we're on. Perhaps the Iraqi Kurds, with their additional funding and support from the US, will launch an assault on Mosul. Perhaps the US will have to send significantly more troops to ensure it goes according to plan. Either way, there is no solution for the day after. Neither the Kurds nor the US Marines are likely to welcome in Mosul for any period of time after the invasion ends. Both would be all but certain to face a low-level insurgency for as long as they stayed.

Returning Mosul to the formal control of the Iraqi government is unlikely to prove successful either. After all, Mosul fell to ISIS in the summer of 2014, due in part to the fact that much of the local Sunni population was sufficiently fed up with the corrupt central government in Baghdad that ISIS didn't seem to be an obviously worse alternative. While any romanticism of ISIS has probably been crushed out of the local population over the past two years of ISIS rule, the corruption of the Iraqi central government endures. Thus, the idea that Baghdad could successfully govern a liberated Mosul essentially relies on the assumption that Sunnis will be excited to trade the devil they know now, for the devil they used to know.

The tragic circumstances above are why nonintervention remains the only appropriate position on Iraq. It's not an endorsement of the status quo, but merely a recognition that there are limits to US military power. The latest announcement from the Administration suggests President Obama is not willing to recognize this yet.

Tuesday, April 19, 2016

There's a new and horrifying first-hand account of the US drone war that recently made it into a mainstream news publication. Over at The Independent in the UK, they present the story of Malik Jalal, a Pakistani man that is trying to get off the US's "Kill List".

At this point, the skeptical reader might reasonably wonder how exactly one learns that they are on the Kill List. After all, it's not like you can just call up a Congressman to ask. (And given the US's history of accidentally targeting people based on similar names or misinterpretations, it's not entirely clear how reliable such a service would be at any rate.) No, instead, Jalal has learned of his status by experiencing multiple brushes with death at the hands of drones. These included the following:

When an SUV identical to his own was behind him on the road and struck by a drone missile

When he lent his car to his nephew to go get an oil change, and the mechanic's shop was bombed by drones

When he was on his way to a friend's house and saw the house get bombed before he arrived

When he told friends he would meet them for lunch, and the place of the meeting was also bombed before his arrival

When he was running late to tribal jirga (roughly akin to a townhall or city council meeting), and the jirga was bombed, killing at least 40 people.

Of course, there are a few ways we could interpret this story. On the one hand, some will certainly try to downplay it and claim he has made it up. But this doesn't really seem like the kind of thing people would use to get 15 minutes of fame. As a general rule, if you live in a targeted region of the world and speak Arabic, making loud statements about the depredations of US foreign policy is probably a bad move if you have an interest in self-preservation. That's a horrible reality, but we should acknowledge that it probably is a reality. After all, it's not like any of the people targeted for assassination are ever proven guilty, so there's nothing at all standing in the way of targeting simple critics and calling them militants later. It goes without saying that most of the media will not challenge that determination.

Given the circumstances above, it's unlikely Jalal has fabricated this story. Thus, we are left with two equally abhorrent alternatives for understanding his story. Either he really is on the Kill List (for no reason, as we'll see), or drone strikes in the tribal areas of Pakistan are so commonplace that he and others have brushes with death on a regular basis. To err on the hopeful side (I guess?), let's assume he's really being targeted.

Then what explains his targeting? Well, he's part of a local group called the North Waziristan Peace Committee that has been trying to restore order to Waziristan tribal region that has been among the hardest hit by the "War on Terror". As part of their mediation efforts, they often engage in negotiations with the Taliban and other militant groups, who are players in the region. Additionally, he was quoted in 2011 expressing criticism and anger at US foreign policy. Those are the best guesses that Jalal and his lawyers have to offer about why he managed to wind up on the Kill List.

And while it's obviously possible he was engaged in other actions that powerful nations might find objectionable, all that proves is the necessity of having due process. In his case, no government agency volunteered any information to attempt to justify his apparent targeting for assassination.

Taking a step back from the Orwellian absurdity described above, there's also the human component. In a recent interview on The Scott Horton Show, Jalal explains that he eventually took to sleeping outside his family home in the hopes that his family wouldn't become collateral damage. Here's his telling of it via a translator [emphasis mine]:

I went outside and slept under the tree and the 7-years-old son of mine, Bilal, he came up to me and he also wanted to spend the night there. And when I said to him, 'Don't worry. You can go home and sleep there; they [the US] wouldn't kill a child.' And he answered back saying, 'How do you know, Father, that they won't kill a child? I, myself, have seen with my own eyes children being killed by drones. So don't tell me they don't target children.'

That's a 7-year-old who already has a rational fear of his own mortality, thanks to US policies.

And if the emotional angle doesn't do it for you, there's always the fact that all of this is unbelievably counterproductive. After enduring the constant presence of armed drones flying overhead for the entirety of President Obama's tenure and part of President Bush's reign before that, there can be no doubt how the vast majority of the affected populations must feel about the United States government. If anyone still asks "why do they hate us?", certainly, the drone assassination program must register in the top 10.

Fortunately, at least to this point, relatively few Muslims and Arabs have become outraged and desperate enough to sacrifice their own life in pursuit of revenge. But every day that goes by with an armed drone circling overhead, and every strike with its inevitable collateral damage, pushes more and more people towards the extremes. Millions of people in Muslim countries live knowing that, if the sky is clear and they happen to be in the wrong place at the wrong time, their lives could end at any moment from a hellfire missile. If the word terrorism is to have any coherent meaning at all, the US drone program would be the epitome of it.

In closing, Jalal's story is a reminder of the horrors US foreign policy under Democrats and Republicans alike. The assassination program destroys innocent lives, inspires more radical anti-American sentiments in its wake, and operates without the pretense of due process. And even if no major politician in this election cycle is going to oppose this policy,* you should.

*Yes, that includes Bernie. His opposition to the death penalty only applies to domestic criminals that receive a trial; foreigners that do not receive a trial are totally fair game, as long as they're from a sufficiently obscure country.

A new article at Reason this week makes an obvious but necessary correction to the standard understanding of how the Scandinavian economies are actually structured. Presidential Candidate Bernie Sanders and his supporters are prone to citing Scandinavia, especially Sweden and Denmark, as examples of the benefits socialist economic policies can bring.

And to be sure, there is a Social Democrat party in Sweden. But according to Johan Norberg's new piece, Bernie and the Social Democrats wouldn't find a whole lot to agree on. As Norberg puts it:

Sanders is right: America would benefit hugely from modeling her economic and social policies after her Scandinavian sisters. But Sanders should be careful what he wishes for. When he asks for "trade policies that work for the working families of our nation and not just the CEOs of large, multi-national corporations," Social Democrats in Sweden would take this to mean trade liberalization—which would have the benefit of exposing monopolist fat cats to competition—not the protectionism that Sanders favors....

This reality will not endear my home country to American socialists, but it's better to be hated for the right reasons than to be loved for the wrong ones, as the saying goes. Being more like modern Sweden actually means deregulation, free trade, a national school voucher system, partially privatized pensions, no property tax, no inheritance tax, and much lower corporate taxes. Sorry to burst your bubble, Bernie.

The whole article is worth reading, but the short version goes like this. Sweden was a very a open, market economy that grew rapidly up until about the 1970s. During the 70s and up through the 90s or so, it embarked on a series more socialistic policies in the direction that Sanders wants the US to move. The result was a rapid decline in growth and in real wages for average Swedes. Fortunately, the policies were such obvious failures that Sweden was able to adjust course, and return to be one of the freest economies in the world--freer by most metrics than the United States. This has in turn coincided with improved economic performance.

Of course, there are two key ways in which Sweden (and Denmark) are still less free than the US. One lies in their personal income tax schemes. Although it has relatively low corporate tax rates, Sweden has high personal income tax rates that fall significantly on the middle class and poor and are actually far less progressive than the US system. (Sweden still ranks very highly in measures of economic freedom because the personal income tax burden is but one of many factors.) The other way in which it diverges from the archetypal free market economy is that it does have a large welfare system, including paying for education and healthcare. The aggressive personal taxation system makes this system possible.

In addition to offering some interesting history on the Swedish economy, the article also shows the importance of having a coherent economic theory to make sense of the world around us. Correlation is not causation, as the axiom goes, and this is especially true for economics. Too often, we are wont to look at a snapshot of a particular point in time and draw the conclusions that usually conform to our own preconceptions. Thus, Bernie Sanders supporters can look at the fact that Sweden and Denmark are doing relatively well economically and also have a large welfare state, and presume a causal relationship. Or at the very worst, they might presume the welfare state does not hinder the economy. Similarly, an uninformed free market supporter could look at Sweden, see its free trade policies and automatically, and assume this is the cause of its success. In the absent of a theory to make sense of it, neither of those positions is any more credible than the other. It's just people making the facts of the world follow the pattern they would prefer them to. We are all predisposed to this way of thinking.

That's why it's important to have a theory that can stand up to scrutiny. Data can be helpful, but it rarely tells a story on its own in the field of economics. The story of Sweden is no exception to this rule. However, the general understanding of free market economists helps us make sense of Sweden's experience. Broadly speaking, free market economists would anticipate that low taxes and low regulation will bring about ideal conditions for economic growth by creating strong incentives for people to earn and limited barriers to get in their way. Meanwhile, when government expands, it will tend to have the inverse effect. According to Norberg's telling of it, Sweden's results have followed this free market narrative closely.

One case study is not proof of anything. But understanding Sweden's past and present is critical given the distorted image it often takes on in an American setting. If one wants to advocate for Scandinavian-style policies, the first step is to understand precisely what those policies are. Bernie would do well to take that under advisement.

Monday, April 18, 2016

Interesting and positive news broke out on the foreign policy front last week as new legislation has been proposed in the Congress. That may sound unlikely, but it's actually true. In particular, the new legislation proposes to eliminate sovereign immunity for foreign governments in cases that involve attacks that kill US civilians on US soil.

For those that may not be aware, sovereign immunity is the legal principle that makes foreign governments, and their agents, immune from prosecution when they violate local laws. These arrangements are often reciprocal in nature--for example, the US and its agents / diplomats have local immunity from Saudi Arabian law, and the Saudis are afforded the same privilege.

On its face, this idea probably sounds like a common sense way to avoid needless diplomatic incidents. That is, if a diplomat were to get prosecuted for some minor infraction, it could create a controversial incident between the parent countries of the diplomat and the prosecutors. However, it seems equally clear that such laws need very clear limits. At the very least, murder and terrorism seem like they ought to be over the line. Amazingly, they are not--or at least not overtly so.

That's what the new legislation seeks to change. The New York Timescharacterized the bill as follows:

The Senate bill is intended to make clear that the immunity given to foreign nations under the law should not apply in cases where nations are found culpable for terrorist attacks that kill Americans on United States soil. If the bill were to pass both houses of Congress and be signed by the president, it could clear a path for the role of the Saudi government to be examined in the Sept. 11 lawsuits.

Indeed, 9/11 is what this new legislation is all about. Family members of the victims of the 9/11 attacks, believe that influential Saudis, possibly including the Saudi government itself, may have been involved in financing the 9/11 attacks. This may sound like a conspiracy theory. Surely, the US government--which has initiated 15 years of continuous war, in Afghanistan and elsewhere, in response to those terrorist attacks--would not knowingly shield people who were actually involved from prosecution. That sounds crazy. And yet, there's actually some compelling reasons to believe this is a possibility.

For starters, 15 of 19 hijackers were Saudi citizens. This fact alone makes it at least possible that their backers might have been Saudi as well. Second, the official US investigation of the 9/11 attacks culminated in what is commonly known as the 9/11 Commission Report, which sought to identify the perpetrators and motivations behind the attacks, among other things. While most of the report followed the standard Washington script and downplayed the influence of US foreign policy in inspiring the attacks, 28 pages of this report relating specifically to Saudi involvement were made classified and remain so to this day. Only high-ranking government officials and members of Congress are allowed to read these pages, and they must do so under oddly extreme circumstances--reportedly, for instance, they are not allowed to take notes and are observed while reading the documents. So either, there's something really worth hiding in these pages, or the US Government has decided to troll would-be conspiracy theorists (and the 9/11 victims' families) in an unprecedented fashion. Personally, my money is on the former. On the plus side, there's recently been new attention placed on the issue of declassifying these 28 pages, including a 60 Minutes segment on the topic last week.

Perhaps what is even more interesting than what this bill is about, is how it's being opposed. The two groups lobbying most strongly against suspending sovereign immunity for terrorist attacks are the Obama Administration and the Saudi Government itself. We'll unpack each of these in turn.Obama Administration Opposition
The Obama Administration opposes this legislation for two main reasons: that it would jeopardize US relations with Saudi Arabia and that it could put Americans overseas in legal risk if other countries retaliate with similar legislation that weakens sovereign immunity.

The first objection is the standard establishment foreign policy view. This holds that the alliance with Saudi Arabia is critical for stability in the region, and a valuable partner as such. However, this rationale readily breaks down upon closer scrutiny. Saudi Arabia remains one of the few actual monarchies in existence today, and it's complicit in quite a bit of instability in the region right now. At the top of that list is the ongoing catastrophic War in Yemen, which the US is supporting. Additionally, the Saudis are highly implicated in directly arming some of the hardcore jihadist elements of the rebellion in Syria. Given that both of these policies have been disastrous, it's not at all clear why the US would be harmed by dissociating itself from the Kingdom.

And for the record, oil is in no way a valid excuse for this relationship. The Saudis are a major oil producer, but that oil is sold on a global market. The US does not need an alliance to gain access to it. The Saudis can't afford not to sell the oil, and even if they could, the world's oil production is much more diverse now than it was decades ago when a Saudi embargo might have been a threat.

The other reason the Obama Administration is opposing this legislation is similarly invalid. It is of course possible that other countries will retaliate by promising to hold Americans accountable if they kill their civilians on a given country's soil. Okay, but is this really such a bad thing? If there really are Americans killing civilians on another country's soil, should we really demand that they are immune to prosecution? This is an especially good question given that countries where the US is actively engaged in supporting the government militarily (like Afghanistan) typically have separately negotiated deals that explicitly limit soldiers' liability. So given that this would be outside of the major war zones, what possible moral or legal framework could justify a demand that Americans be immune to prosecution.Call me crazy, but that seems unlikely to either give the US a positive image around the world or make us safer.

Saudi Arabia Opposition
If the Obama Administration sounds absurd, somehow the Saudi position is actually worse. Saudi Arabia has taken to threatening economic backlash. The specific threat is that the Saudi Government claims it would be forced to immediately sell off its US assets, including $750 billion in US Treasury Bonds. Their reasoning is that if legislation gets passed that allows Saudi officials to be sued for involvement in 9/11 financing, then they probably will get sued and their US assets would be frozen accordingly.

They're probably right about this. If they get sued, their assets would be frozen. But what's incredible about this, is that it's almost an admission of guilt. Apparently, the Saudis believe that an immunity clause and/or the continued classification of the 28 pages of the 9/11 Commission Report, is all that stands between them and a very expensive lawsuit or outright prosecution. If this is really true, it seems like an even better reason to allow the lawsuits to proceed.

Moreover, it's possible that a fire sale of US Bonds would have deleterious consequences on US financial stability. But it would be equally harmful for the Saudi bondholders. If they really tried to dump those assets all at once, they would likely spark a panic sell-off from other investors. This, in turn, means that many of the bonds will be sold at a fraction of their initial value. So yes, the Saudis could possibly bring some instability to the US, but only by significantly hurting their own financial position in the process.

Summing Up
On questions of foreign policy, there are some issues that seem so complicated that they offer no good solutions. This isn't one of them. If the Saudis really were involved in financing 9/11, they should be held accountable. If they weren't, then it's beneficial for the American people to know that as well. It's possible that other countries will retaliate in kind by suspending immunity for American agents on foreign soil. But if American agents are involved in murdering civilians, as the Saudis are accused, should we really demand that they be immune from prosecution? Similarly, the Saudi relationship is often seen as invaluable in conventional foreign policy circles. But if the Saudis are now attempting financial blackmail to avoid an airing of the facts, in addition to their ongoing misdeeds in the Middle East, now seems like as good of a time as any to start reconsidering.

Friday, April 15, 2016

When it comes to the question of antidiscrimination, free market economists and libertarians tend to suggest a laissez-faire solution that strikes many people as naive. The story goes something like this for consumers:

Suppose a hypothetical business's customers are 80% white and 20% black. This business is located in a place where many white people are racist. Further suppose that these racist customers are opposed to the idea of eating in an integrated restaurant. Thus, the self-interested business owner makes a calculation that enough of his customers (and the local population) are racist that he might be able to win more business by excluding black people from his restaurants--because he'll gain more favor with those racist customers. And whatever small minority might be offended by it (i.e. the more egalitarian-minded white people) and the minorities themselves, will be too small to offset his gains. If his math is right, and it may well be if racism is popular enough, this might make business sense. (Of course, if by contrast, the amount of the population that is virulently racist is relatively small, then discriminating on race would be counterproductive, even in amoral economic terms.)

It doesn't really matter whether the owner himself is racist or not. The decision will, or will not be economically sustainable based on the opinions of the public in general, regardless of the owner's own views.

So based on the above story, we must concede that it is possible that discrimination could, under certain conditions, make business sense. I'm not sufficiently familiar with how quickly opinions evolved in the South, so I won't claim to know how long this remained economically feasible. For these purposes, it is enough to acknowledge that is a possibility. So the question becomes, what happens to the minorities? Will there be any businesses to serve their needs?

And the answer is obviously yes. Indeed, the discrimination of the businesses, means that minorities would be an untapped market that would be easy for the entrepreneur to gain as customers. They might devise a business that caters exclusively to the needs of those minorities, or, more likely, they might make an integrated establishment that could attract a wider range of customers. Assuming the latter, over time this second business would also be sustainable. If we further assume the general trend that younger generations tend to be more tolerant (at least of race, gender, etc.) than their parents continues, then this second business would become more profitable in the long run, and the discriminatory business would eventually have to change its ways as its customer base shrinks. Even if we assume no change in tolerance over time, it's still the case that the business serving minorities should be able to do so properly. Discrimination might exist in this case, but no one is being denied access / underserved.

Logically, this story should make sense as long as we assume (at least some) people are motivated by self-interest. And while the more pessimistic edition (where discrimination is sustainable) may not be ideal, it still avoids the most important problem of minorities being frozen out of the market.

But there seems to be a problem with this story. Because obviously, discrimination really did exist in a major way in the American South. America has a free market, and yet Rosa Parks was still discriminated against on the Montgomery buses. How do we account for this? Surely we must have gotten something wrong in the story above if the free market produced such an outcome?

This is the cognitive dissonance that people naturally face when they hear the economics case against antidiscrimination laws. It doesn't seem to conform to the historical reality we learned about.

Fortunately, there's a quick article by economist Thomas Sowell (who happens to be black, if you find that relevant), that helps us reconcile these conflicting ideas. Sowell's piece focuses on the famous Montgomery Bus Boycott episode. He explains that, in fact, the state government passed the laws that required the private bus operators to segregate their buses--and business owners actually unsuccessfully lobbied to block the legislation because they didn't want to lose the business of the minority customers (and most of their white constituents were indifferent).

In other words, Sowell's article suggests that, at least in this prominent case, the free market did not produce a discriminatory business model. In fact, the government required discrimination, and self-interested business owners tried to fight it. Sowell also offers an excellent summary of why the market process fights discrimination while the political process encouraged it (emphasis mine):

These [private bus company] owners may have been racists themselves but they were in business to make a profit -- and you don't make a profit by alienating a lot of your customers...

People who decry the fact that businesses are in business "just to make money" seldom understand the implications of what they are saying. You make money by doing what other people want, not what you want.

Black people's money was just as good as white people's money, even though that was not the case when it came to votes.

Thursday, April 14, 2016

This past Tuesday was Equal Pay Day, which is focused on trying to resolve the gender wage gap. The reason Equal Pay Day is on April 12, is because that's when John F. Kennedy signed the Equal Pay Act of 1963 into law. Now some 50 years later, the wage gap still exists in some form; Equal Pay Day is aimed at reminding us of this fact.

But while it is true that wage gap still exists, it is important to understand the precise details of what exactly that means. The oft-cited statistic that women make 77 cents for every dollar a man makes is as shocking as it is misleading. Only by understanding the definition and causes of a wage gap can we move on to determine what, if anything, could be an actual solution.

In this piece, we'll begin by explaining what the 77 cents figure means as well as what other measures of the wage gap can tell us. Then we'll briefly discuss the likelihood of discrimination, and we'll close by contemplating what stronger equal pay legislation might look like in practice, and whether it would conceivably work.

Lies, Damn Lies, Statistics, and Gender Wage Gap Discussions

A common claim that one hears on this subject is that women make 77 cents in the workplace for every dollar a man makes. This is true, but it doesn't mean what most people (myself included, until quite recently) imagine it to mean.

What many people think this means--and indeed, it is sometimes explicitly stated in this format, incorrectly--is that if a man and a woman have the exact same job in places with the same cost of living, the woman will make, on average, 77 percent as much. If true, that would be distressing. But this is manifestly not what this statistic means.

In reality, what it means is that if you look at the median full-time weekly earnings of all women in the US, across all fields, and divide it by the median full-time weekly earnings of all men in the US, you get a ratio of about 77 percent.

That's an interesting result perhaps, but it actually tells us very little. To see why, let's consider a quick and simple hypothetical. Suppose that the US economy contained only two professions for a moment, economists and janitors, and in this economy, all economists are women, and all janitors are men. And because this hypothetical society takes the maxim that "cleanliness is next to Godliness" very much to heart, sanitation services command a premium. In particular, all janitors earn $100k a year while economists earn just $70k a year. If we were to run the same median earnings calculation that produces the 77 percent number above, we would find that women make 70 percent as much as men in the hypothetical economy. That said, we could also say, in our hypothetical, that economists make 70 percent as much as janitors. The former could imply some kind of untoward discrimination between men and women; the latter is merely evidence that janitorial services are more highly demanded / valued than economics services.

Back in the real world, we find something similar as a cause for part of the discrepancy in median earnings. According to a recent analysis on this subject, approximately 25 percent of the gender wage gap can be explained simply by the fact that women tend to be concentrated in professions that, on average, pay lower salaries than the professions that men dominate.

What of the other 75%? Well, a few other key factors likely to be involved are the following:

Number of hours worked (even in full time professions, men tend to work more hours than women)

Work experience

Educational background (today there are slightly more women in college than men, but there's probably still some catching up to do for average education levels to be roughly equal in the workforce)

Career interruptions (for example, to have and raise young children), which tend to limit the rise in one's earnings

A 2007 study controlled for these factors and then compared hourly wages among men and women (thereby, theoretically comparing men and women that had the same characteristics, and worked the same hours), found that this could explain all but 5 percent of the overall wage gap. That is, if this study were taken as gospel, then the general talking point would be updated to say that women make 95 cents for every dollar a man makes.

And that's about as close to equality as the more honest statistical calculations will get us. We can't say for sure what explains the remaining 5%. Perhaps it is completely or partially due to discrimination. And perhaps it's due to women preferring other job benefits, like flexible hours, as opposed to exclusively focusing on pay. Things like that can't be easily captured in the data, and it's not clear how one would quantify their value even if we could identify it.

Another thing to remember here is that all of the statistics discussed above, even the studies that attempt to control for occupations, are still painting with a very broad brush. People working in business and finance might tend to make more than people working in education. But there is still a massive range of jobs that fall under the umbrella of "business and finance", probably anywhere from bank teller to hedge fund manager. To the extent that women or men are concentrated in jobs within industries that are more or less highly compensated, this won't likely be captured in the data.

Note that none of this should be taken to mean either that a) the gender wage gap is a complete myth or b) wage discrimination against women never occurs. It simply means that the usual narrative on this subject is very misleading.

Would Greed Prevent Wage Discrimination?

This is a bit of an aside, but it is useful to clarify precisely what wage discrimination would entail in practice.

As I understand it, wage discrimination implies that an employer will decide to pay a woman less than a man for equivalent work. There might be legitimate reasons for this (i.e. factors that have nothing to do with gender), but let's assume a case where the reasons are not legitimate at all. Our employer is just an avowed misogynist. He just got out of a bad relationship, and he has now decided that all women are to blame for the state of his personal life; paying his female employees less is his effort at attaining justice through collective punishment.

Now let's imagine similar views, or views that have the same practical effect, cause other employers to engage in the same practice of paying female employees less for no good reason. This is, after all, what is necessarily implied in discussions of a gender wage gap, that the pay disparity is entirely without just cause.

In this case, women are being dramatically underpaid relative to what they are worth. It then follows that a smart entrepreneur could come in and offer to pay women more than what they are currently making (90 percent of a man's wage instead of 77 percent), and get two significant benefits from this approach:

Since they are paying more than the competition, they could probably choose the very best female candidates for their company.

They would still get a discount relative to what they would need to pay a merely average male candidate.

It follows therefore that many entrepreneurs, solely out of concern for running a profitable efficient company rather than any social justice ethos, would jump at the chance to compete for women that are currently being underpaid. Indeed, the only reason that (at least some) entrepreneurs wouldn't pursue this strategy is if everyone thought that even the best female candidates wouldn't perform as well as an average male candidate. Call me optimistic, but I don't view this as a prevalent worldview in the US. And even if it were, you would only need a few business people to break this norm and take a chance on the strategy above. Undoubtedly, they would outperform their competition upon doing so. And over time, this natural competitive pressure would tend to eliminate any wage discrimination entirely.

Here again, this should not be taken to mean that discrimination never occurs. But for better or worse, self-interest tends to be a very reliable predictor of behavior. To assume that wage discrimination is happening and is widespread throughout the economy, we must also assume that the general impulse for misogyny (even among women, since they can be entrepreneurs too) is more powerful than the desire to pursue one's own material self-interest. At least in the US, I find that very difficult to believe.

What Should The Government Do About It?

It may be a frustrating answer to this question, but the best answer is probably nothing.

This is the necessary conclusion once we understand the factors that explain most of the pay disparity, as discussed above:

Educational attainment

Occupational choice

Hours worked

Career interruptions

Work experience

See the problem here is that the above items, except for work experience, come down to a matter of preferences for men and women. For example, many women go into teaching, which is not a high-paying profession. If the government were to try to correct for this, they only have three options, in order roughly from least to most extreme. They can either a) engage in an educational campaign to try to convince more women to pursue high-paying fields (or convince men to pursue low-paying fields), b) mandate an equal number of men and women get high-paying degrees/credentials in a given year by applying rules on public universities, for example, or c) require all occupations be compensated equally. Option A is possible, but there's obviously no guarantee of success. Meanwhile, options B and C are (hopefully) sufficiently absurd on their face that they do not require a thorough refutation here.

So if they can't really fix the preferences problem, what about work experience? Here they could assign a requirement that all businesses compensate for work experience equally (e.g. $1,000 more per year of experience) or, compensate people equally, regardless of their experience. But of course, this is really just a slightly different form of Option C from above and is in no way feasible. Moreover, who hasn't had a boss they couldn't stand at some point in their life? Would you honestly want them to always get paid more than you, just on account of them having existed longer? I submit that no reasonable person could answer that in the affirmative.

What about the prospect of preventing actual, arbirtrary discrimination? Here the prospects for government intervention would seem to be decent, but in fact, the options aren't much better. In theory, the way the government could help prevent discrimination would be to make it easier for women to sue for discrimination. And for this to happen, there would need to be a more objective and straightforward way for people to prove they had been discriminated against.

President Obama moved in this direction when he signed Lilly Ledbetter Act in 2009, which made it easier to claim discrimination. He also took another step down this path recently, when he announced plans to require federal contractors to report additional pay data. In particular, companies that are federal contractors will be required to report pay data based on ethnicity, race, and sex, and they would also report where it falls within 12 pay bands (0 - $19k, $19k - $24k, etc.). Under the new reporting scheme, each employee would also be categorized among 10 arbitrary job categories, as follows:

Executive/Senior Level Officials and Managers

First/Mid Level Officials and Managers

Professionals

Technicians

Sales Workers

Administrative Support Workers

Craft Workers

Operatives

Laborers and Helpers

Service Workers

It's probably pretty easy to see where this is going. If you have people that have the same job category land in different pay tiers, and then they also happen to have a different gender, it will appear to be an objective proof of discrimination. But that's only because these categories are so general. Should a CEO get paid more than a Vice President of a company? Well, probably yes, but they'd both fall in the same category above, so how would we know whether that was the reason or something more nefarious? This and other examples are bound to show up.

At least initially, this reporting proposal is aimed to "facilitate voluntary compliance" and is thankfully limited to federal contractors as mentioned. But we should not be at all surprised if it gets rolled out to the rest of the private employers and/or starts being used to litigate discrimination cases sometime soon. If and when that happens, it will not be helpful. It will create ever more litigation and bureaucracy. And to the extent that it does have an impact on employer pay practices, it will just mean ensuring all people in a given job category fall in the same arbitrary pay band. High-performing employees won't be able to advance as quickly; low-performing / less qualified employees will likely get fired (or never hired) instead of paid lower wages, so the employer could avoid charges of discrimination. It would be a change, but it's not at all clear, it's a change for the better. And that's about the best case scenario.

The essential problem with devising a government solution to this issue is that it assumes the government could acquire all the relevant information needed to determine what an objectively fair wage is for a given person--personality, follow-through, efficiency, experience, education, work ethic--literally everything. This is absurd on its face. It doesn't matter how many lines the government wants to add to the EEO-1 reporting form; they won't and can't capture everything that matters. Therefore, any decisions they attempt to make on what a fair wage is, will necessarily be wrong most of the time.

Ultimately, a fair wage has a much simpler definition that avoids all of these complications. A fair wage is one that an employee voluntarily agrees to work for and an employer voluntarily agrees to pay them. Those are the two parties that know the most about the relevant details of the situation, and they are also the only two parties affected by the decision. Thus, their decision is really the only one that matters.

Summing Up

The gender wage gap is an important issue for many people, and it is not hard to understand why. However, we have explained that the popular narrative about this subject obscures many important facts. The gender wage gap does exist, but it is caused primarily by preferences that are difficult and undesirable to "correct". Discrimination is surely a problem in some cases, but there are natural forces built into a market economy that are likely to eliminate this over time. Even if the government wanted to do something to prevent discrimination directly, they do not have and cannot acquire the knowledge necessarily to objectively determine what is fair, and will fail accordingly.

So it's still true that the gender wage gap does exist, but it doesn't mean what we think it means. And any government solutions designed to address it are all but certain to be more harmful than the problem they seek to solve.

Tuesday, April 12, 2016

President Obama rightly raised a few eyebrows recently when he chose to weigh in on the Hillary Clinton email situation. In an apparent effort to downplay the episode, Obama said, "There's classified and then there's classified." Obama then went on to explain the important difference:

There’s stuff that is really top-secret Top Secret, and there’s stuff that is being presented to the president or the secretary of state that you might not want on the transom, or going out over the wire, but is basically stuff that you could get in open-source.

Undoubtedly, he is correct about this. The US Government classifies all kinds of harmless and/or publicly known information. The US Government also has a history of prosecuting people when they mishandle classified information, mundane or otherwise, even when there's no evidence of harm or intent to distribute the information. Obviously, neither of these is a good thing. The US shouldn't classify items that are in the public record or holiday email greetings, or any number of either minor things. And if one of those things accidentally gets carried off-base by a government employee, they shouldn't have their career or life ruined over it. Surely, these are things we can all agree on.

But we should also agree that they're irrelevant to the question at hand.

What Obama is effectively doing here is providing Hillary Clinton with political cover. Instead of making it a question of whether she violated the law and should be held accountable, he's framing it as an incredibly tedious episode of bureaucratic bickering on classification. "Well, you see 'top-secret' is for... while 'confidential' is just for things like"--please, please make it stop. The goal seems to be to make the issue so fantastically boring that everyone just gives up so they don't have to waste five more minutes trying to understand the cluster that is government classification. And frankly, it's probably going to be a pretty effective strategy.

We must fight the urge to tune it out, however, because this story actually does matter. Not because her server was clearly vulnerable and now the fiendish Chinese (or is it the Russians this week?) have access to America's most important secrets. On the contrary, judging from some of the foreign policy decisions Hillary championed while in office, it seems clear that she did not have access to uniquely valuable or even reliable information.* That's not why it's an issue.

Rather, it matters because it's another public test for the rule of law in the US--whether there's one set of laws that applies to the unconnected, and another set of rules that applies to the powerful. We've failed this test in the last few rounds, and President Obama's latest remarks are an unfortunate sign that this trend is likely to continue.

For more on this story and the implied double standard here, check out Trevor Timm's analysis at the Columbia Journalism Review:

*For what it's worth, we should note that the Hillary Clinton email cache included, thus far, at least 22 emails that were deemed so secret that they had to be withheld from the general public. It may be the case that those have been erroneously classified as the Clinton campaign contends. But given that the overwhelming majority of her emails have been released, it seems plausible to assume there is something different about them. I'm sure they still wouldn't destroy America if they got out, but it they do offer more support to the idea that Hillary broke the rules in a non-negligible way.